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Last Week in Event SPACE: Singapore Press Holdings, Afterpay, Link Admin, Razer, AusNet, 51job

1.7k Views07 Nov 2021 07:44
SUMMARY

Last Week in Event SPACE ...

  • The rally in Keppel Offer Consideration for Singapore Press Holdings (SPH SP) may be mechanical, driven by short-covering in SPH REIT (SPHREIT SP) and Keppel REIT (KREIT SP). But Cuscaden Peak is going to have to intimate that it is willing to go higher.
  • Afterpay (APT AU)'s key competitor, Affirm Holdings (AFRM US), is up 160% since the Square Inc (SQ US) transaction was announced. And if Square shares fall further after somewhat lacklustre earnings reported this week, the idea of an overbid starts looking even better (Afterpay long up, Square short down).
  • Carlyle's renewed proposal for Link Administration Holdings (LNK AU) appears fair, but is even more compelling when analysing the premium to the rump.
  • Game on as founders of Razer Inc (1337 HK) mull Offer.
  • Aussie electricity and gas distribution company Ausnet Services (AST AU) has agreed to a binding takeover offer from a consortium including Brookfield. The question is, will APA Group (APA AU) reload? The word is: no.
  • Trading in 51 Job Inc Adr (JOBS US) has been volatile as China's internet sector campaign kicked into gear and internet-related stocks were scrutinised. The complete absence of any newsflow on this take-private deal also did not help. Which makes this latest development on financing a compelling argument for the deal to complete.
  • Plus, other events, CCASS movements (flagging possible Offers and IPO lock-ups), and Mood Spins.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classifications, and Events - or SPACE - in the past week)

M&A - ASIA

Singapore Press Holdings (SPH SP) (Mkt Cap: $2.5bn; Liquidity: $9mn)

Last week, Cuscaden Peak Pte. Limited announced a counterproposal for SPH at S$2.10/share in cash, topping the Scheme Consideration in the Keppel Corp (KEP SP) cash/scrip Offer. The "problem" for Cuscaden in offering such a price was that arbitrageurs who may have had the trade on would need to buy back Keppel REIT (KREIT SP) and SPH REIT (SPHREIT SP) shares which they would have shorted to put on the arb. That would mechanically force the REIT prices higher, pushing the Keppel Scheme Consideration higher.

  • Cuscaden Peak will have to up its proposal for it to be taken seriously, but there is no reason that it cannot be taken seriously. S$2.20 would not be too much to pay if you are Cuscaden. You do not enter into this complex arrangement, buying a bucket of businesses, with a Chain Rule Offer near an 18-month high, without having some leeway in your offer. Furthermore, the way Singapore Takeovers Code Chain Rule Offers work, a higher bid on SPH would not mean a higher Chain Rule Offer on SPH REIT.
  • Because the Keppel Offer Consideration is gaining in value in part because of the Cuscaden Offer, Keppel should be able to increase its consideration to "match" a higher Cuscaden Proposal. At this point, if Cuscaden offered S$2.20, Keppel could offer another 6cts of cash and that would get them to a matched level.
  • The highest level of the Keppel Consideration Basket since mid-summer 2018 is S$2.167/share on a div-adjusted basis (i.e. stripping out past dividends as appropriate "carry" for the risk taken over time). Stay long SPH, but if Keppel Scheme Consideration nears S$2.20, it starts to make Cuscaden have to stretch more. I do not know how far they would be willing to stretch for REIT-ish real estate.

(link to Travis Lundy's insight: SPH Update: Keppel, SPH REIT Chain Offer, and Cuscaden Strategy)

Back on the 2 August, Square Inc (SQ US) and Afterpay (APT AU) announced a firm merger, the completion of which will create Australia's largest-ever buyout. Under the terms of the Offer, by way of a Scheme, Afterpay shareholders will receive a fixed exchange ratio of 0.375 shares of Square Class A common stock for each Afterpay ordinary share. Based on Square’s closing price of US$247.26 on July 30, 2021, this represented an implied transaction price of ~A$126.21 per Afterpay share, or a premium of ~30.6%. Square's shareholders approved the issuance of Square shares for the acquisition of Afterpay. This was shortly followed by the dispatch of the Scheme Booklet. The Scheme Meeting will be held on the 6 December with expected implementation on the 18 January. The Independent Expert reckons the Offer is fair and reasonable. This looks done. Link to my insight: Afterpay Ltd (APT AU)/Square (SQ US) Merger: Scheme Meeting Convened.

Shinsei Bank (8303 JP) (Mkt Cap: $3.3bn; Liquidity: $26mn)

SBI Holdings (8473 JP) reported earnings after the close of 28 October. Earnings were high, and ROE achieved a record high. Most notable in the analyst meeting afterwards was a barrage of comments about Shinsei seemingly meant to embarrass and disparage Shinsei senior management, and possibly the entire Shinsei management layer. Kitao-san likened the fact that Shinsei had not repaid public monies this long after the injection/conversion to "theft" and spent considerable time comparing apples to bananas. It was not encouraging. Furthermore, he also said that he was "overpaying" at ¥2,000 and had no intention of raising his price. Long-term, Travis thinks the stock is interesting, and medium-term, he sees either the possibility of a counter/over-bid or competing buyback tender OR an above-minimum pro-ration ratio which would mean the back-end was appropriately inexpensive.

  • Proxy advisor Glass Lewis has now come out in support of the Poison Pill at the Shinsei EGM. This surprised the market and shares - which had been trading in the ¥1,860-1,870/share range after last week's large TOPIX and JPX Nikkei 400 index down-weight fell sharply - ending the day down more than 3% - a big move for a risk arb situation, While the Glass Lewis and ISS voting guidelines suggest that they generally vote against Poison Pills, there are conditions under which they could support. They don't say they will endorse a poison pill if managements do meet those hurdles, just that they could not support if they don't. Shinsei's poison pill plan met all those hurdles as it proposed in its 21 October 2021 document (p27-28) where it came out against the SBI Tender Offer, officially.
  • The question is, how will the FSA vote? The two government entities which own the stock are the Resolution & Collection Corporation (RCC) which owns 26.912mm shares, and the Deposit Insurance Corporation of Japan (DICJ), which owns 20.00mm shares. Together their 46.912mm shares are worth about 22.31% of voting rights, which is a bit more than the total owned by SBI which is opposing the poison pill to be voted on at the EGM.
  • Travis still expects the FSA should decide that discretion is the better part of valour and decide not to vote. Also, while Shinsei's arguments were not bad, they did not seem to be good enough to reject a change in ownership if investors want to sell. A tender offer does not oblige investors to sell. The stock, however, has reacted badly meaning that there is now the start of a risk priced into the market that the EGM could pass the poison pill.

(links to Travis' insights: Aggressive Commentary by SBI About Shinsei at Earnings & Further Shinsei Complications: Glass Lewis Endorses the Poison Pill. Will the FSA Vote?

Link Administration Holdings (LNK AU) (Mkt Cap: $1.8bn; Liquidity: $9mn)

Carlyle has returned to the well with a non-binding offer of $5.38/share, by way of a Scheme, valuing Link at A$2.8bn. The Offer consideration is $3.00/share in cash for Link's core business, plus a pro-rata distribution of Link’s 42.8% stake in PEXA Group (PXA AU), which has a look-through value of A$2.38/share. Therefore Carlyle's proposal values each Link share at $5.38/share, a 24.2% premium to last close. More importantly, that $3/shar in cash compares to the implied stub value of A$1.95/share.

  • This remains a non-binding situation. Due diligence has not yet been afforded. Management has had strong views on the valuation of the company in the past; and even after fielding solid Offers for PEXA, still opted to go the IPO route. Yet PEP/Carlyle Group undertook around three months of due diligence - for the entire Link Group - during its prior proposal.
  • Trading at a gross/annualised spread of 13.1%/34.7%, assuming five months to complete. There are risks attached to Indicative Offers in Australia. However, Carlyle's perseverance allays some of those concerns. And they know this company. Expect DD to be granted. This appears a very fair Offer.

(link to my insight: Link Admin (LNK AU): Carlyle Returns. With A Lower Offer)

Razer Inc (1337 HK) (Mkt Cap: $2.6bn; Liquidity: $10mn)

The previous Friday (the 29 October), Razer's shares went into a trading halt prior to the morning secession "pending the release of an announcement in relation to inside information of the Company and pursuant to the Hong Kong Code on Takeovers and Merger". A follow-up announcement that evening said Min-Liang Tan (CEO and major shareholder with 234.35%) and Lim Kaling (NED, holding 23.46% of shares out) were in preliminary discussions with financial investors, which may or may not lead to a general offer. No price was mentioned.

  • If Tan and Lim were exiting, this could be done via a Scheme, an SPA followed by an MGO, or a conditional voluntary general offer. OR ... Tan and Lim intend to take Razer private. This more than likely would involve a Scheme, in which both Tan and Lim are required to abstain from voting at the Court Meeting.
  • What is fair? Using a sum of parts calculation, I estimate a fair value of HK$2.36/share, which is close to where Tan and Lim placed out shares in June. Optically, this could be pitched around HK$2.50/share, where there has been some support this year. As discussed in my monthly wrap, the Offer price for Hong Kong transactions year-to-date has been done at an average premium to last close of 33%. That backs out a possible price of HK$2.60/share.
  • Razer is in play. At the time of my insight, when shares trading at $2.11, this was a buy.

(link to my insight: Razer (1337 HK): Game On As Founders Mull Offer)

Ausnet Services (AST AU) (Mkt Cap: $7.4bn; Liquidity: $13mn)

Since Victorian electricity operator AusNet announced it would grant Brookfield due diligence access after receiving a revised non-binding Offer of A$2.50/share, up from $2.35/share on the 30 August, there has been a knotty backdrop involving competing bidder APA Group (APA AU). Brookfield has now bumped its Offer to $2.65/share, in cash, and AusNet has entered into a Scheme Implementation Deed (SID). The Offer has unanimous board support. Singapore Power with 32.74% has said it would vote in favour of the Scheme. No word from China's State Grid. A requirement under the SID is that AusNet cease discussions with other parties. AusNet has terminated APA's due diligence access.

  • Will APA load up? Maybe. Maybe not. APA's response to the SID with Brookfield was: "While APA has received strong support from investors in both AusNet and APA Group for its proposed acquisition, APA will continue to remain financially disciplined". That doesn't sound too committed to bumping.
  • Trading tight to terms. I would not chase it. I'm not entirely confident APA will table a superior Offer. Brookfield's firm Offer is 14.2% above APA's initial Offer of $A$2.32/share.

(link to my insight: AusNet (AST AU) Enters Scheme With Brookfield)

India-based integrated logistics company Allcargo Logistics (AGLL IN) has more-than-tripled in value since last August. The “Delisting Proposal" from its Promoter Group (Shashi Kiran Shetty and Talentos Entertainment Private Limited) in August 2020 initiated this rally and after several twists and turns the stock is currently trading at INR328.50 which translates to a +201% gain against the undisturbed price of INR109.00 prior to the announcement of this Delisting Proposal. In Allcargo (AGLL IN): More-Than-Triple Now. What Next?, Janaghan Jeyakumar takes a closer look at the company's latest earnings release which has caused the share price to jump by almost +20% today.

Back on the 4 October, construction materials testing company Intega Group Ltd (ITG AU) announced it had entered into a Scheme Implementation Deed (SID) with Dutch outfit Kiwa. The SID was struck at A$0.90/share, a 58% premium to last close. Crescent Capital Partners, with 54.72% of shares out, supports the SID and will vote in favour. Potentially more cash (via dividends) if FIRB approval is not received by 31 December. HSR approval also needed. The Scheme Booklet is now out. The Scheme Meeting will be held on the 6 December with an expected implementation date of 17 December. Looks done. Link to my insight: Intega (ITG AU): Scheme Booklet Out. Meeting On The 6 December.

As discussed in Aussie Bank Buyback Season Starts - Expect A$12-15bn and Funky Flows, Travis expected Westpac Banking (WBC AU) to announce a A$3.0bn off-market buyback as early as late August but probably in Q3 based on substantial outperformance vs expectations in the covid downturn, and excess capital and franking credits to return. The bank has now announced an Off-Market Buyback of A$3.5bn (and shareholder return of A$5.7bn including dividends) based on a CET ratio of 12.3%, which is well above the APRA's 10.5% level of "unquestionably strong." However, earnings were below expected as NIMs fell 9bp from 2.07% to 1.98% (two-thirds of which was due to competition and one-third due to different mortgage mix) and H2 costs were up as the bank fast-tracked investment to process mortgages faster and with lower cost going forward. The buyback is also probably a little smaller than many had expected. Expectations had increased as CBA had come out larger than the Street expected. Link to Travis' insight: Westpac (WBC AU) Announces a BIG Off-Market Buyback.

Back on the 18th October, gold miner Ramelius Resources (RMS AU) made a recommended takeover offer for Apollo Consolidated (AOP AU), by way of cash and scrip, at A$0.56/share, a 27% premium to Apollo's 3-day VWAP. Then on the 21 October Gold Road Resources (GOR AU) made an unconditional off-market all-cash Offer - at A$0.56/share. Gold Road, holding 19.9% at the time of the announcement, also stood in the market at $0.56/share. Now Ramelius has bumped its Offer to A$0.62/share comprising $0.34/share in cash plus 0.1778 Ramelius shares for Apollo shares. Ramelius also secured binding agreements to acquire a 19.9% shareholding in Apollo from Apollo’s board and Apollo’s second-largest shareholder. The Bidder's Statement has been dispatched, with a first closing date is on the 3 December. The Offer is unconditional. Trading through terms. Link to my insight: Apollo (AOP AU)'s Shares Trading Through Ramelius' Revised Offer.

Sunac Services Holdings (1516 HK) intends to acquire a 32.22% stake in First Service Holding (2107 HK), the completion of which will trigger an unconditional mandatory cash offer. The Offer Price is HK$2.6167/share, a 91% premium to the closing price of First Service prior to the trading halt on October 8. Zhang Lei is currently the major shareholder of First Service with 51.39%. He is also the major shareholder and chairman of cash-strapped Modern Land China (1107 HK) with 65.38%. His holding in First Service will decline to 30% upon the completion of the agreements with Sunac Services. Proceeds from the sale of HK$843mn, which may be subject to revision, are expected to be used to repay Modern Land's debt. This appears a knock-out Offer for First Service. It is Sunac Services' intention to delist the company, should 90% of disinterested shareholders tender. Timing is the key issue. Link to my insight: Sunac Services' Offer For First Service (2107 HK) May Support Modern Land.

Kansai Super Market (9919 JP) announced that the EGM had passed the Share Exchange proposal and all related proposals related to later absorption mergers and changes of director. The trade now is to buy back a short on Kansai Super. The value from selling/underweighting/shorting Kansai Super at the near-¥2,000/share price is now realized. There is no real point in staying short here. Link to Travis' insight: Kansai Super (9919) Still Not Super as Shareholders Agree H2O Deal.

Praemium Ltd (PPS AU) (Mkt Cap: $0.6bn; Liquidity: $2mn)

Investment administrator PPS has rejected a non-binding proposal from key competitor Netwealth (NWL AU). By way of a Scheme, Netwealth was offering 1 new NWL share for every 11.96 PPS shares, or an indicative Offer consideration of A$1.50, a 29% premium to last close, and a lifetime high. PPS' board said the Proposal did not appropriately value Praemium’s current performance, near-term trajectory, growth momentum, and was not representative of recent transaction premia in the Australian platform and funds administration space.

  • This space is indeed hot. When PPS peer Onevue Holdings (OVH AU) was taken private in the middle of last year (as discussed by Janaghan in OneVue-Iress: Australian Deal Trading Wide), the independent expert flagged (page 132) 12 peers (including PPS and NWL). Of the remaining 10, two have been taken private, two were in the cross-hairs but no firm deal unfolded, and two more are ongoing.
  • Praemium flagged the premium under the proposal to last close was not in keeping with precedents. Grant Thornton highlighted the premium to last price of 47.9% for precedent transactions - page 150. Mainstream Group Holdings Ltd (MAI AU) is being done at +128.6% and Class Ltd (CL1 AU) +71.6%.
  • Currently trading 2.8% through terms (at the time of the insight). Apart from the premium to last close, the proposal for Praemium appears full. Yet this sector is very much in demand. The competitive bidding situation for Mainstream is illustrative. And the wealth platform market is estimated at A$980bn. Expect more consolidation. I'd be happy to build a position around the Indicative Offer price. I'd also be running a ruler over the other Aussie platform payers. Fiducian (FID AU) has been the best performing play in the last year, but its small-cap size is an outlier.

Temasek and investment unit Startree Investments Pte. announced that 1.249bn shares had been tendered into the Sembcorp Marine (SMM SP) Offer. That gets Temasek over 50%. Normally, that would mean extension of the Mandatory Offer under Rule 22.6 of the Singapore Takeovers Code. This time, it does not, because of Rule 22.6 of the Singapore Takeovers Code. The offer closed on 3 November 2021. Link to Travis' insight: Sembcorp Marine MGO Goes Unconditional But No Extension. Deadline Is 3 Nov.

Sojitz Corp (2768 JP) and Japan Airlines (9201 JP) together announced they had created an entity to buy out minorities in Jalux Inc (2729 JP), which operates in the aircraft and airport ground equipment servicing businesses, and airline servicing businesses. Sojitz already owns 22.22% and JAL owns 21.56%, and Japan Airport Terminal owns 8.08%. Minorities own 48.14%. The goal is to take the company private, buying at least 1.8741mm shares from the minorities to get to two-thirds plus a share. This is a takeover which was long expected. At a 50% premium, it looks OK. It is not a blowout price. It could have been higher given the structure of the balance sheet and the fact that the price is not that generous in terms of DCF multiple. It is long-dated. The Tender won't start until early February and will last six weeks. Squeezeout will be May. Link to Travis' insight: Sojitz and JAL to Buy Out JALUX Minorities in Tender Offer.

STUBS

Kakao Corp (035720 KS) (Mkt Cap: $46.9bn; Liquidity: $438mn)

Despite Kakao Pay (377300 KS)'s meteoric debut, parent Kakao Corp appears fully priced. Massive up-days are not uncommon in South Korea. KakaoBank (323410 KS) gained 80% on its debut in August.

  • Last month the Financial Supervisory Service Governor Jeong Eun-bo expressed an intention to impose tougher regulations on Naver Corp (035420 KS), Kakao, and other large tech firms in the financial sector: "Following big tech firms' accelerated entries into the financial sector, we will regulate their operations and come up with reasonable supervisory measures to enable fair competition between digital platform providers and financial companies".
  • Expect more volatility in Kakao Pay as investors grapple with what is "fair" - the general consensus is that the company was rich at the IPO price - together with concerns about how the financial regulator assesses Pay's business model.
  • Kakao has various entities slated for IPO, and such newsflow about these listings will likely generate positive interest in Kakao. But expect delays as the recently introduced Financial Consumer Protection Act forms the backdrop for fintech companies to be subjected to similar regulations similar to that of traditional financial institutions. This should also temper valuations, but as seen with Pay, investors have not yet got the message.

(link to my insight: StubWorld: Kakao Is Still Cuckoo After Pay Doubles)

Beenos Inc (3328 JP) is a relatively small cross-border e-commerce and internet company from Japan with a consolidated GMV of ¥63.2bn in the last four quarters. Moreover, Beenos has done some extremely successful investments under its incubator program over the years, including Tokopedia and the Indian car sales marketplace Droom. These two investments are expected to have their IPOs soon with significant unrealised gains to early-stage investors like Beenos. Link to Oshadhi Kumarasiri's insight: Beenos: NAV Discount to Reach 46% Following GoTo & Droom Valuation Adjustments.

EVENTS

51 weeks ago, then-President Donald Trump signed Executive Order 13959 which, banned US Person transactions and eventually investments in a number of stocks, China Mobile (941 HK) and China Telecom (H) (728 HK) included. The two major Chinese telecom companies had been listed on the NYSE and those securities were delisted from the Exchange, and there were global index deletions by MSCI, FTSE, S&P and others, and Southbound Connect investors ended up buying a very large amount of what passive holders and US Persons sold. The two major telecom companies started the process of listing their shares in China last spring, with China Mobile trailing China Telecom by a couple of months. There is likely to be news in the very near-term which could affect how people think about the two stocks. Travis would want to be long China Mobile vs China Telecom, and long China Mobile outright. Link to Travis' insight: Last Look at China Mobile Convexity Near-Term?
UPDATE: The CSRC approved the RMB A-share listing of China Mobile. The CSRC has indicated but not provided written confirmation. There are still other regulatory approvals pending (exchange and others) but these should be rubber stamps.

On 22 October, Tokyo Kikai Seisakusho (6335 JP) (TKS) held its EGM to have shareholders vote on its Poison Pill designed to limit the expansion of voting rights of its major shareholder Asia Development Capital (9318 JP) ("ADC"). ADC announced that it objected to the fact that its votes had not been counted, and noted that had its votes been counted, the combination of its votes and the other objectors would have defeated the Poison Pill. The Tokyo District Court decision supporting the TKS decision to ignore the votes of ADC is unfortunate and a bad precedent because it dismisses the provision of equality of shareholders. However, while this may seem counterintuitive, if the Tokyo District Court decision is upheld at the High Court and Supreme Court, this could be the beginning of changes to the Takeover Rules in Japan which would mandate that in cases of control, a majority of minority be required to decide on potential control. That would make Parent-Subsidiary takeover situations a LOT more interesting. Link to Travis' insight: Tokyo Kikai Seisakusho (6335) - Poison Pill Approval Appealed and Possible Silver Linings

Macquarie Group (MQG AU) sold 7.7mm shares at A$194.00/share, a 1.9% discount to close after starting the bookbuild at a 4% discount, with shares sold settling on 3 November and eligible to receive the upcoming dividend. Existing institutional shareholders were entitled to participate up to a pro-rata total and 90% of the 7.7mm shares were placed with existing shareholders with the other 10% placed with new shareholders. As noted on Friday in the presentation, Macquarie's non-institutional shareholders will be entitled to participate in a Share Purchase Plan for up to A$30,000 each, with that offer opening on 8 November (i.e. NOT entitled to receive the dividend) and closing 26 November. The price will be the lower of the A$194.00 Placement Price less A$2.72/share of dividends and a price equivalent to 98% of the five day VWAP through the close of the SPP Period. This will be a no-brainer for existing holders (there are 173,000 holders as of the last Annual Report with 1,000 shares or fewer). This will have effects on index trackers. Link to Travis' insight: Macquarie Placement - Index Effects Dispersed Over Time and Space

In Kakao Bank Lock-Up - Watch Out for Netmarble Led Blocks, Sumeet Singh discusses the expiry of the three-month lock-up on KakaoBank (323410 KS), but it's largely a nothing burger - around US$1bn, less than 5 days of ADV.

Monex Group Inc (8698 JP) is locked limit up after the company announced that it would list its US Tradestation unit through an SPAC with Mike Novogratz’s Galaxy Digital getting involved in a PIPE. They also released a rather punchy ¥650bn SOTP valuation vs. the current limit up market cap of ¥192bn. Link to Mio's insight: Monex - ¥650bn in Value You Say?

M&A - US

51 Job Inc Adr (JOBS US)Mkt Cap: $4.5bn; Liquidity: $23mn)

Back on the 21 June, IR solutions provider 51job announced it had entered into a definitive privatisation agreement at US$79.05/share. Just last week in 51job (JOB US): Searching For Answers, when the gross spread to terms was 30.8% - the widest since the take-private transaction was first floated on the 17 September 2020 - I thought this was the right price to get involved. Despite China's ongoing scrutiny of the internet industry, I had not seen any specific issue pushing back on this deal. Additionally, wasn't helping people find jobs more easily in-line with common prosperity?

  • 51job has now updated its Schedule 13D - an SEC form to be filed when a person or group acquires more than 5% of a company. The amendment discusses facility agreements entered into with China Merchants Bank, the lead arranger, and Shanghai Pudong Development Bank Co (joint lead arranger). The facilities provide funding of US$2.275bn, just shy of the US$2.6bn required to complete the transaction. Shares gained 9.8% on this development, the only newsflow since the firm agreement was entered into.
  • Timing from here? This still remains unclear. But the 13D amendment all but confirming necessary funding indicates this transaction is moving towards completion. This is a buy.

M&A - EUROPE

This takeout offer of Otis Worldwide Corp (OTIS US) for Zardoya Otis SA (ZOT SM) makes sense. On 28 October, the CNMV accepted the offer. Zardoya Otis must issue a report with its opinion within 10 days hence. The Zardoya family, the second largest shareholder in the company, with a 11.3% stake has yet to comment on the offer. This shareholding is enough to block a squeeze-out. Also DWS and Samson Rock, among others, are on the shareholding register. Link to Jesus Rodriguez Aguilar's insight: Otis/Zardoya Otis: Possibility of a Sweetened Offer.

Deals in the regulated power industry have longer closing times (and higher spreads) than those of other sectors. On 2 November, Ashley Schannauer, the hearing examiner for the New Mexico Public Regulation Commission in charge of the merger application, recommended against the proposed $4.3 billion merger between Avangrid Inc (AGR US), an affiliate of Iberdrola SA (IBE SM), and PNM Resources (PNM US), saying its potential harms outweigh benefits to the public. Investors are getting nervous on the stumbling block of Mr. Schannauer's 447-page report. Link to Jesus' insight: Hearing Examiner Recommends Against Iberdrola (Avangrid)/PNM Resources Deal.

SHARE CLASS

The sound bite in the last week was Microsoft Corp (MSFT US) surpassing Apple Inc (AAPL US) as the world's most valuable company. Yet 13 years ago, almost to the day, the world's largest company was Volkswagen (VOW GR). For one day at least, as the ords took off as short-sellers sought to cover the positions following an announcement by Porsche Automobil Holding Se (PAH3 GR) that revealed the VW ord float was significantly less than shares currently short. The ord premium is on the run again.

  • Why the bifurcation? I see no apparent reason. Arguably the premium is around where it was pre-2006, before Porsche started accumulating shares. It is possible that the divergence is simply another move where speculators are taking aim at low float high short interest: float ratio situations to squeeze, like they did for Avis Budget Group (CAR US) this week. Or, inexplicably, the reddit/Robinhood crowd are only able to buy the ords via the ADR and not the prefs.
  • But this does not justify the recent sudden move. And the ords are now trading at a forward PER of 10.7x compared to 7.1x for the prefs.
  • The apparent trade is to short the ords, long the prefs. That didn't quite work out so well thirteen years ago. And without the benefit of understanding why this recent move has occurred, I'd be reluctant to set the trade up. I expect the right trade may be to be long the prefs. If the ords/pref ratio is going to be sucked up speculatively, the prefs will follow the ords and the prefs are cheap as it is.

(link to my insight: Volkswagen's Ords Are Acting Up - Again)

Chiyoda Corp (6366 JP)'s 2Q results confirmed an improving gross margin trend and continued cost control at the SG&A level. With gas and copper prices at high levels the order environment should remain extremely strong and strong operating performance could open up Chiyoda’s options to reduce the dilution potential of its preferred shares. Link to Mio Kato's insight: Chiyoda – LNG Prices, Preferred Shares, Put Options, Call Options and Reflexivity)

M&A RISK ARB WEEKLY ROUND-UP

  • This insight provides a quick summary of gross/annualised (where possible) spreads (on deals discussed on Smartkarma) across Asia-Pacific as at the last trading date, and how those spreads have changed over the last week; plus the next hard events over the coming weeks. I number 49, mostly firm, deals around the region.

(link to my insight: Asia-Pac Weekly Risk Arb Summary: Afterpay, Link Admin, Razer, AusNet, First Service)

INDEX REBALS

OTHER M&A & EVENT UPDATES

  • Unusual development: Hollysys Automation Technology (HOLI US) announced the filing of the FY21 (June Y/E) Annual Report is delayed as the result of the impact of the delayed financial statement preparation process caused by the delay in collecting supporting documents and information. Separately, Hollysys announced Union Power HK CPA Limited and replaced E&Y as its accountant, but further added that "EY’s audit report on the Company’s consolidated financial statements as of and for the year ended June 30, 2020 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles."

  • MMC Corp Bhd (MMC MK) announced the High Court had on 1 November 2021 granted the Order confirming the reduction of the issued share capital. That was quicker than expected - a good thing.
  • New Zealand's Commerce Commission has received a clearance application from Ampol (ALD AU) seeking clearance to acquire 100% of the shares in Z Energy Ltd (ZEL NZ). As part of the application, Ampol has offered an undertaking to sell its Gull business, either by a trade sale or an IPO.
  • Chinese Estates Holdings (127 HK) provided an update to say there is no update, and the Scheme Doc is still expected to be dispatched on the 24 November. I wonder if this suggests there might be further delays in the dispatch?
  • Kuala Lumpur Kepong (KLK MK) now holds 90% in Ijm Plantations (IJMP MK). Shares will be suspended on the 26 November, before the open.
  • As expected, ESR Cayman (1821 HK)'s shareholders approved the acquisition of ARA at an EGM.

  • Sigma Healthcare (SIG AU) said it dropped its takeover bid for Australian Pharmaceutical Industries (API AU).

  • Kyocera Corp (6971 JP) announced that it would conduct a ToSTNeT-3 buyback tomorrow morning, to buy back up to 4,000,000 shares at JPY 6,789/share, spending up to JPY 27.156bn. That is 1.1% of shares out.

CCASS

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.

  • Often these moves can easily be explained - the placement of new shares, rights issue, movements subsequent to a takeover, lock-up expiry, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.

Name

% chg

Into

Out of

China Singyes Solar Tech (750 HK) 15.87%GuoyuanCBCB
Kepei Education (1890 HK) 14.89%GSSt Chart
Yt Realty (75 HK) 11.01%SeekersOutside CCASS
F8 Ent (8347 HK)18.51%MonexNumerous
Jlogo (8527 HK)18.10%China IndKingston
Source: HKEx
  • The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.

Name

% chg

Into

Out of

Beijing Airdoc Technology (2251 HK) 13.03%GSOutside CCASS
Zhaoke Ophthalmology Pharmaceutical (6622 HK) 12.94%HSBCOutside CCASS
Helen's International Holdings (9869 HK) 12.71%St ChartCICC
Channel Micron (2115 HK)10.28%DBSPhlilip
Source: HKEx

I listen to a bunch of music when writing insights. Here are a handful of tunes, old & new, that piqued my interest during the week: Tame Impala's Solitude Is Bliss, José González's Tjomme, Mark de Clive-Lowe's Joyful Resistance Part II, Snail Mail's Valentine.

What are you listening to?

Enjoy your Sunday!
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